JPMorgan's Dimon says credit crisis could worJPMorgan's Dimon says credit crisis could worsensen
ARLINGTON (Virginia) - JPMORGAN Chase Chief Executive Jamie Dimon said some problems in the credit markets have been resolved, but that does not mean market conditions will not deteriorate further.
'I do think we have some very serious issues to face,' Mr Dimon said on Tuesday at a mortgage lending forum sponsored by the Federal Deposit Insurance. 'Things could actually get worse.'
Wall Street investment banks should not be considered too big to fail, he said, adding the United States regulatory response to the credit crisis has been appropriate.
Mr Dimon, whose bank is widely expected to acquire a regional bank, said an accounting rule requiring banks to mark assets to their current market value is a deterrent to mergers.
FAS 157, as the rule is known, would force an acquirer to write down the value of assets from a target bank - even if the loans and securities were sound - to reflect current depressed market values. In some cases, Mr Dimon said, a target bank could emerge with negative value under this mark-to-market accounting, forcing an acquirer to raise more capital.
With more short-term suffering ahead for the economy, Mr Dimon said US commercial banks, regional banks and jobs will be the next areas to experience significant stress. Banks must get more realistic about the risk with some products, he said.
'Capital requirements go too low in certain products,' he said. 'You have to try to be as conservative as possible.'
Receivership for investment banks
Regarding the US regulatory response to the credit crisis, Mr Dimon said the top officials have done well within their legislative limitations.
'I think the government is taking proper, in my opinion, monetary and fiscal policy at this point,' he said.
In March, the Federal Reserve helped engineer a takeover of Bear Stearns by JPMorgan and guaranteed a US$29 billion (S$40 billion) loan to facilitate the transaction, out of concern that a Bear Stearns bankruptcy could trigger a financial panic.
The Fed also started making emergency loans to investment banks for the first time since the Great Depression. That measure expires in September, but Fed Chairman Ben Bernanke said on Tuesday the emergency lending facility may stay open past the year end to help restore market stability.
Long term, the US government needs a mechanism to let it act as a receiver for a failing investment bank and set up a so-called bridge bank for an orderly liquidation, Mr Dimon said.
That model now exists for US commercial banks. Treasury Secretary Henry Paulson has called for a similar approach with investment banks.
'The government can take over the institution, wipe out the equity holders and then deal with secured debt in a way that's appropriate,' Mr Dimon said, referring to a receivership mechanism. 'It's complicated, but we need that option. They're not too big to fail.'
Saving the golden goose
He also urged Congress to overhaul the patchwork system of financial services regulation.
'One day we have to stop saying it's not politically feasible,' Mr Dimon said. 'If we don't, we'll never have policies.'
Democrat Barney Frank, chairman of the House Financial Services Committee, will launch a series of hearings on Thursday laying the groundwork for financial services reform legislation in 2009 after a new administration takes over.
Mr Frank has proposed giving the Fed or another agency power to monitor all risk in the financial system. US Treasury Secretary Paulson has said the Fed should be given permanent authority as a 'market stability regulator'.
'I hope things like that start to become serious policy down the road,' Mr Dimon said.
But he also said the financial services industry should be wary of excessive regulation that could limit their activities and drive business overseas.
'We have to worry about the unintended consequences of regulation,' he said. 'Let's not kill the golden goose here.' -- REUTERS
'I do think we have some very serious issues to face,' Mr Dimon said on Tuesday at a mortgage lending forum sponsored by the Federal Deposit Insurance. 'Things could actually get worse.'
Wall Street investment banks should not be considered too big to fail, he said, adding the United States regulatory response to the credit crisis has been appropriate.
Mr Dimon, whose bank is widely expected to acquire a regional bank, said an accounting rule requiring banks to mark assets to their current market value is a deterrent to mergers.
FAS 157, as the rule is known, would force an acquirer to write down the value of assets from a target bank - even if the loans and securities were sound - to reflect current depressed market values. In some cases, Mr Dimon said, a target bank could emerge with negative value under this mark-to-market accounting, forcing an acquirer to raise more capital.
With more short-term suffering ahead for the economy, Mr Dimon said US commercial banks, regional banks and jobs will be the next areas to experience significant stress. Banks must get more realistic about the risk with some products, he said.
'Capital requirements go too low in certain products,' he said. 'You have to try to be as conservative as possible.'
Receivership for investment banks
Regarding the US regulatory response to the credit crisis, Mr Dimon said the top officials have done well within their legislative limitations.
'I think the government is taking proper, in my opinion, monetary and fiscal policy at this point,' he said.
In March, the Federal Reserve helped engineer a takeover of Bear Stearns by JPMorgan and guaranteed a US$29 billion (S$40 billion) loan to facilitate the transaction, out of concern that a Bear Stearns bankruptcy could trigger a financial panic.
The Fed also started making emergency loans to investment banks for the first time since the Great Depression. That measure expires in September, but Fed Chairman Ben Bernanke said on Tuesday the emergency lending facility may stay open past the year end to help restore market stability.
Long term, the US government needs a mechanism to let it act as a receiver for a failing investment bank and set up a so-called bridge bank for an orderly liquidation, Mr Dimon said.
That model now exists for US commercial banks. Treasury Secretary Henry Paulson has called for a similar approach with investment banks.
'The government can take over the institution, wipe out the equity holders and then deal with secured debt in a way that's appropriate,' Mr Dimon said, referring to a receivership mechanism. 'It's complicated, but we need that option. They're not too big to fail.'
Saving the golden goose
He also urged Congress to overhaul the patchwork system of financial services regulation.
'One day we have to stop saying it's not politically feasible,' Mr Dimon said. 'If we don't, we'll never have policies.'
Democrat Barney Frank, chairman of the House Financial Services Committee, will launch a series of hearings on Thursday laying the groundwork for financial services reform legislation in 2009 after a new administration takes over.
Mr Frank has proposed giving the Fed or another agency power to monitor all risk in the financial system. US Treasury Secretary Paulson has said the Fed should be given permanent authority as a 'market stability regulator'.
'I hope things like that start to become serious policy down the road,' Mr Dimon said.
But he also said the financial services industry should be wary of excessive regulation that could limit their activities and drive business overseas.
'We have to worry about the unintended consequences of regulation,' he said. 'Let's not kill the golden goose here.' -- REUTERS
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